Product Differentiation with Consumer Arbitrage

Iñaki Aguirre and Maria Paz Espinosa

No 1134-8984, BILTOKI from Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística)

Abstract: We analyze the consequences of consumers behavior concerning personal arbitrage in a spatial discrimination context where firms know the consumers distribution but cannot distinguish them by location. The firms' equilibrium pricing policies provide incentives for consumers not to demand their preferred varieties of products but rather to purchase more standard varieties. This behavior may explain a decrease in observed market diversity: the demanded varieties tend to agglomerate around the center of the market. We also deal with efficiency in the presence of personal arbitrage and show that it is efficient that the cost of adapting the product to the consumers needs be shared through arbitrage, but oligopoly gives rise to an inefficient level of personal arbitrage.

Keywords: spatial price discrimination; product differentiation; personal arbitrage (search for similar items in EconPapers)
Date: 2003-03
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Journal Article: Product differentiation with consumer arbitrage (2004)
Working Paper: Product Differentiation with Consumer Arbitrage (2003)
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Dpto. de Econometría y Estadística, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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